a

GAO

United States General Accounting Office

March 2003 HIGHLIGHTS OF A 

GAO SYMPOSIUM

Addressing Key 

Challenges in an 

Intergovernmental 

Setting

GAO-03-365SP
Participants discussed key intergovernmental challenges facing all levels of 

government and identified the following four as the most significant: 

1. Mismatch between current revenues and spending demands. 

Increased spending demands and revenue shortfalls during economic 

downturns affect states’ ability to fund their share of key programs. 

Participants discussed the causes of the spending and revenue mismatch, 

federal and state options for addressing it, and their respective 

advantages and disadvantages. Beyond current shortfalls, participants 

focused on long-term structural fiscal pressures that will continue to test 

the capacity of the intergovernmental system. Certain structural forces, 

such as changes in the global economy and the aging of the population, 

will continue to prompt stress on both the revenue and spending sides of 

the budget at all levels of government. 

2. Intergovernmental financing of health care, particularly long-term 

care for the elderly and disabled. Participants agreed that funding health 

care costs for a growing aging population is the most significant 

intergovernmental fiscal challenge. Medicaid costs will likely continue to 

grow at a high rate due to such factors as increasingly high health care costs 

and the aging of the population. The discussion focused on the need to 

restructure health care financing for the disabled and aged and to develop a 

sustainable intergovernmental solution. 

3. Current tax structures at all levels of government and interrelationships between them. Participants agreed on the need to 

review the tax structures of all levels of government collectively and for 

policy makers to better consider the relationships between them. The 

national economy is becoming increasingly interconnected and global as 

business is conducted across state and national boundaries—potentially 

undermining the capacity of current tax systems to reach transactions in 

such an economy. 

4.Consider reassessing the assignment of responsibilities. In 

recent years, the federal government has continued to mandate new 

responsibilities for achieving national goals on state and local 

governments, by law or regulation. Participants agreed that the fiscal 

and administrative resources of state and local governments vary and 

may not be sufficient to fulfill this increased responsibility for national 

priorities. One model involves sorting out intergovernmental functions 

with the federal government assuming responsibility for functions that 

are redistributive in nature, and delegating other responsibilities to states 

and localities. 

HIGHLIGHTS OF A GAO SYMPOSIUM

Addressing Key Challenges in an 

Intergovernmental Setting 

www.gao.gov/cgi-bin/getrpt?GAO-03-365SP.

To view the full report click on the link above. 

For more information, contact Paul Posner at 

(202) 512-9573 or posnerp@gao.gov. 

Highlights of GAO-03-365SP 

March 2003

Responding to many of the nation’s 

critical challenges—such as 

meeting the health care needs of 

the poor or countering terrorist 

threats—has been the joint 

responsibility of all levels of 

government. The effectiveness of 

federal programs has increasingly 

become dependent on state and 

local management and resources, 

as well as constructive interactions 

between federal, state, and local 

actors, including private and nonprofit actors who are joining with 

government officials to carry out 

national policies and programs. 

This increased interdependence 

among levels of government 

presents many challenges. While 

many policy areas have been 

nationalized and federally funded, 

greater responsibility has been 

devolved to state and local 

governments for implementing 

programs to achieve national goals. 

The intergovernmental system is 

facing the complexity of managing 

programs involving numerous 

actors, and the flexibility and 

capacity of the federal system to 

respond to unique local needs is 

challenged by long-term national 

and international trends. 

 

On November 20, 2002, GAO 

convened a symposium to identify 

and discuss the key policy and 

fiscal issues facing the 

intergovernmental system. The 

invited participants represented 

federal, state, and local 

governments, national associations, 

public interest groups, and 

research and academic institutions. 
Page i GAO-03-365SP 

Contents

Letter 1

Appendixes

Appendix I: Participants Attending the November 20, 2002 GAO 

Symposium—“Addressing Key Challenges in an 

Intergovernmental Setting” 5

Introductory Speakers 5

Participants 5

GAO’s Symposium on Addressing Key Challenges in an 

Intergovernmental Setting 7

Background and Highlights of the Discussion 7

1. Mismatch Between Current Revenues and Spending Demands 8

2. Intergovernmental Financing of Health Care, Particularly 

Long-term Care for the Elderly and Disabled 14

3. Current Tax Structures at All Levels of Government and 

Interrelationships Between Them 18

4. Consider Reassessing the Assignment of Responsibilities 22

Discussion of Need for an Ongoing Dialogue and Possible 

Framework 28

Summary of Introductory Remarks 

Appendix IV: Intergovernmental Relations Symposium Slide 

Presentation

Appendix V: Grant Programs to State and Local Governments

Figures Figure 1: Composition of Spending as a Share of GDP Assuming 

Discretionary Spending Grows With GDP and the Tax 

Cuts Do Not Sunset 9

Figure 2: State Spending by Function as a Percent of Total State 

Spending After 1, 5, and 10 Years 16

Figure 3: Federal and State Revenue Trends 19

Figure 4: Number of Federal Preemption Statutes Enacted Per 

Decade 26

Figure 5: Summary of the Number of Grant Programs to State and 

Local Governments: Fiscal Year 2001 44

Figure 6: The 20 Largest Grant Programs to State and Local 

Governments: Fiscal Year 2001 (obligations in billions) 45

Figure 7: Trend in the Number of Federal Grant Programs to State 

and Local Governments 1980-2001 46
Contents

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Page 1 GAO-03-365SP 

United States General Accounting Office

Washington, D.C. 20548

A Letr

Highlights of a GAO Symposium on Addressing Key Challenges in an 

Intergovernmental Setting

Addressing many of the nation’s critical challenges—such as meeting the 

health care needs of the poor or countering terrorist threats—increasingly 

depends on the joint efforts of all levels of government. The effectiveness 

of federal programs has increasingly become dependent on state and local 

management and resources, as well as constructive interactions between 

federal, state, and local actors, including private and nonprofit actors. 

Consequently, the fiscal and policy fortunes of each level of government in 

our system are increasingly interdependent. While citizens have demanded 

federal action and many policy areas have become nationalized, this has 

been accompanied by a growing reliance on state and local governments to 

implement national goals. These arrangements confer mutual benefits: the 

federal government gains valuable political and fiscal partners and state 

and local governments gain federal resources and support. 

However, the increasing connections among governments in our system 

have also raised vexing governance challenges. State and local 

governments have been confronted with the challenge of addressing their 

own unique responsibilities while at the same time assuming stewardship 

for a growing number of national goals. The federal government must 

reconcile its accountability for achieving national outcomes with its 

growing reliance on independent third parties. It can be confusing for the 

public to identify responsibilities for outcomes when so many players at all 

levels of government are involved. 

The intergovernmental system is now being tested by a complex array of 

specific short-term and long-term challenges. For example, in areas ranging 

from homeland security to education and health care, federal, state, and 

local governments are facing an increasing range of daunting problems in 

managing programs involving numerous actors inside and outside of 

government. Moreover, the unique advantages of a federal system—the 

flexibility and capacity to respond to unique local needs—are challenged 

by long-term trends such as advances in technology and communications 

that span state and even national boundaries and inspire demands for 

consistent national regulatory and tax policies. 
Page 2 GAO-03-365SP 

Currently, the system’s challenges are most sharply defined by increasingly 

acute expenditure and revenue pressures occurring at all levels of 

government. In the near term, revenues have fallen, while other 

developments, such as health care price increases, unexpected homeland 

security threats, and the war against terrorism have greatly increased 

spending demands at all levels of government. Over the longer term, 

pressures will continue, driven in large part by the aging of the population. 

At the same time, other trends, such as increased global interdependency 

and rapidly advancing technology, could work to undermine tax bases as 

more economic transactions occur within and across our nation’s borders. 

In addition, state and local tax systems are not designed to adequately 

capture services—the biggest growth sector of the economy. Together, 

such trends present fiscal and policy choices that will become far more 

difficult over time if not addressed in a timely fashion.

Recognizing that decision makers can greatly benefit from a better 

understanding of the constraints and challenges that our federal, state, and 

local partners face, GAO convened a symposium on November 20, 2002, to 

discuss the key policy and fiscal issues facing the intergovernmental 

system. The invited participants consisted of a cross section of current and 

former federal, state, and local officials, as well as observers from 

academia, think tanks, public interest groups, and the private sector. The 

summary of the participants’ discussion reflects the views expressed by the 

attendees and does not necessarily represent a complete perspective on 

these issues or reflect the views of GAO. 

As agreed with the participants, our goal was to reach consensus on the top 

challenges facing the intergovernmental system and to engage in an open 

and not-for-attribution-based dialogue. As expected, the forum participants 

expressed a range of views on the challenges facing the intergovernmental 

system. After a lengthy discussion, the following were identified as the 

most significant intergovernmental challenges:

• mismatch between current revenues and spending demands;

• intergovernmental financing of health care, particularly long-term care 

for the elderly and disabled;

• current tax structures at all levels of government and interrelationships 

between them; and

• consider reassessing the assignment of responsibilities.
Page 3 GAO-03-365SP 

Another major topic of discussion was the need for ongoing dialogue about 

national priorities and shared challenges. There was general agreement 

that since the Advisory Commission on Intergovernmental Relations 

(ACIR) was abolished, there has been a lack of a focal point and forum for 

comprehensive discussions of intergovernmental issues and a formal 

mechanism for forging partnerships. While no consensus was reached on 

the type and format for such a renewed forum or focal point, we hope that 

this symposium will serve as a springboard for future dialogue among 

intergovernmental partners on the long-term challenges facing the nation 

and advising the Congress on emerging domestic policy issues. 

Appendix I provides a list of the symposium participants, and appendix II 

provides highlights of the most significant challenges discussed by the 

participants, as well as subsequent comments we received from them on a 

draft summary of the discussion. It also includes a discussion of the need 

for a forum for ongoing dialogue on intergovernmental issues. While 

appendix II largely reflects the insights and perspectives of the 

participants, it also contains additional information, such as that provided 

in the background sections, to provide context and clarity for the 

discussion. Appendix III provides a summary of introductory remarks 

made by David M. Walker, Comptroller General of the United States, and 

David Broder of the Washington Post. Appendix IV contains a set of slides 

presented by GAO at the beginning of the symposium. This presentation 

was designed to provide background information to spur the discussion 

among symposium participants. Finally, appendix V contains an 

informative summary of grants to state and local governments provided to 

us by the Office of Management and Budget. 

I wish to thank the participants for taking the time to share their knowledge 

and provide their insights and perspectives on the important matters this 

document discusses. We look forward to working with them on 

intergovernmental issues of mutual interest and concern in the future. Key 
Page 4 GAO-03-365SP 

contributors to this report were Ann Calvaresi-Barr, Thomas Yatsco, and 

Amelia Shachoy. 

Paul L. Posner

Managing Director, Federal Budget Analysis and

Intergovernmental Relations Issues, Strategic Issues 
Page 5 GAO-03-365SP 

Appendix I

Participants Attending the November 20, 2002 Apendxies

GAO Symposium—“Addressing Key 

Challenges in an Intergovernmental Setting” ApendxiI

Introductory Speakers David M. Walker, Comptroller General of the United States, U.S. General 

Accounting Office 

David M. Broder, Columnist, Washington Post

Paul Posner, Managing Director, Federal Budget Analysis and 

Intergovernmental Relations Issues, Strategic Issues, U.S. General 

Accounting Office 

Participants Jonathan Breul, Director, Federal Management and Performance, IBM 

Business Consulting Service (formerly with the United States Office of 

Management and Budget)

Enid Beaumont, Georgetown Public Policy Institute, Georgetown 

University

Tim Conlan, Associate Professor, Public and International Affairs, George 

Mason University

Harley Duncan, Executive Director, Federation of Tax Administrators

Julia Friedman, Deputy Chief Financial Officer/Chief Economist, 

Government of the District of Columbia

Natwar Gandhi, Chief Financial Officer, Government of the District of 

Columbia

David F. Garrison, Vice President, National Academy of Public 

Administration

William T. Gormley, Professor, Georgetown Public Policy Institute, 

Georgetown University

Robert Greenstein, Executive Director, Center on Budget and Policy 

Priorities

John Kincaid, Professor and Director, Meyner Center for State and Local 

Government, Lafayette College

Iris Lav, Deputy Director, Center on Budget and Policy Priorities 
Appendix I

Participants Attending the November 20, 

2002 GAO Symposium—“Addressing Key 

Challenges in an Intergovernmental Setting”

Page 6 GAO-03-365SP 

Larry Naake, Executive Director, National Association of Counties

Richard P. Nathan, Director, The Nelson A. Rockefeller Institute of 

Government, State University of New York, Albany

Sue Nelson, Democratic Deputy Staff Director, Committee on the Budget, 

United States Senate 

Robert O’Neill, Jr., former President, National Academy of Public 

Administration

Sallyanne Payton, Professor, The University of Michigan Law School 

Scott D. Pattison, Executive Director, National Association of State Budget 

Officers

William Pound, Executive Director, National Conference of State 

Legislatures

Andrew Richardson, Majority Staff Director, Subcommittee on Oversight of 

Government Management, Restructuring and the District of Columbia, 

Committee on Governmental Affairs, United States Senate

Ray Scheppach, Executive Director, National Governors Association

Hannah Sistare, Visiting Fellow, The Brookings Institution

Christopher Smith, Counselor to the Secretary, Department of the Treasury

Carl Stenberg, Dean, College of Liberal Arts, University of Baltimore

Carl Tubblesing, National Conference of State Legislatures

Cameron Whitman, Director, Policy and Federal Relations, National League 

of Cities

Henry Wray, former Senior Counsel, Subcommittee on Government 

Efficiency, Financial Management, and Intergovernmental Relations, 

Committee on Government Reform, House of Representatives
Page 7 GAO-03-365SP 

Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting ApendxiI

Background and 

Highlights of the 

Discussion

This symposium was convened as a springboard to enhance constructive 

discussions among federal, state, and local actors about national priorities 

and resources; discuss possible formats for an ongoing dialogue to forge 

links between all levels of government; help to shape GAO’s future work in 

this area; and eventually advise the Congress on emerging domestic policy 

issues. Our goal in sponsoring the symposium was to have participants 

discuss the full range of challenges facing the intergovernmental system—

with an eye toward those that are long term in nature—and come to 

consensus on the top challenges that need to be addressed collaboratively. 

Discussion of Key 

Challenges 

After introductory remarks, a lengthy discussion ensued of the key 

challenges facing the intergovernmental system. At the close of this 

discussion, participants identified the top intergovernmental challenges 

that need to be addressed collaboratively. Symposium participants 

identified the following four as the top long-term intergovernmental 

challenges:

• mismatch between current revenues and spending demands;

• intergovernmental financing of health care, particularly for long-term 

care of the elderly and disabled;

• current tax structures at all levels of government and interrelationships 

between them; and

• consider reassessing the assignment of responsibilities.

Each section of this summary is prefaced with supplemental background 

information derived from introductory presentations,1

 research and 

interviews conducted by GAO in preparation for the symposium, and 

previous GAO reports. 

1

Introductory presentations were delivered by David M. Walker, Comptroller General of the 

United States; Paul Posner, GAO Managing Director, Federal Budget Analysis and 

Intergovernmental Relations Issues; and David Broder, Columnist, Washington Post. 

Summaries of remarks by Mr. Walker and Mr. Broder can be found in appendix III and slides 

presented by Mr. Walker and Mr. Posner can be found in appendix IV. 
Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting

Page 8 GAO-03-365SP 

1. Mismatch Between 

Current Revenues and 

Spending Demands

Background After the economic boom of the 1990s, all levels of government are now 

experiencing serious fiscal challenges, and are likely to face even more 

fundamental ones in the future. In the short term, revenues are down, while 

other developments, such as higher demand for health and long-term care 

services, health care price increases, and unexpected homeland security 

threats, have greatly increased spending demands. In addition, certain longterm trends, such as the aging of the population, will continue to put 

spending demands on federal and state governments, while other trends, 

such as increasing global interdependency and advancing technology, will 

likely affect traditional sources of government revenues by reducing tax 

bases. 

Current and projected fluctuations in resources have had serious 

repercussions for the entire intergovernmental system. The federal budget 

has moved from unprecedented federal surpluses of the late 1990s to 

deficits. The Congressional Budget Office (CBO) now projects federal 

deficits of $246 billion in fiscal year 2003 and $200 billion in fiscal year 2004 

as the baseline before further policy actions.2

 Along with a decline in 

revenues, spending demands have increased. Within the past year alone, 

the impact of the terrorist events of September 11, 2001, required the 

federal government to take on greater responsibilities, health care costs 

continued to grow at double-digit rates, and the war on terrorism has 

increased defense needs. 

Over the longer term, the retirement of the Baby Boom generation will 

place greater demands on federal programs like Social Security, Medicare, 

and Medicaid if they remain unchanged. Under most scenarios, rapidly 

escalating and unsustainable deficits will emerge over the next several 

decades absent structural changes to the spending or revenue side of the 

federal budget (see fig. 1).

2

The March 2003 budget outlook under CBO’s adjusted baseline assumes discretionary 

budget authority for 2003 will total $751 billion and grow with inflation thereafter.
Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting

Page 9 GAO-03-365SP 

Figure 1: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows With GDP and the Tax Cuts Do Not Sunset

The need to fund mandatory programs such as Social Security, Medicare, 

and Medicaid—as well as increased spending for defense and homeland 

security—will heighten tensions with other domestic spending priorities, 

such as education, the environment, physical infrastructure, and housing 

and community development. State and local officials worry that 

heightened federal funding pressures could mean that state and local 

governments will be faced with using more of their own resources to meet 

service demands. 

As greater expectations and spending pressures are being placed on states 

and localities—including new federal initiatives such as raising educational 

standards, enhancing homeland security, implementing election reforms, 

and rising Medicaid costs—they are experiencing significant, recurring 

revenue shortfalls that are negatively affecting their budgets. For example, 

fiscal year 2002 personal income tax collections missed states’ targets by 13 

percent and corporate income taxes were nearly 22 percent lower than 

0

10

20

30

40

2000 2015 2030 2050

Fiscal year

Percent of GDP

Net interest

Social Security

Medicare and Medicaid

All other spending

Revenue

Source: GAO’s January 2003 analysis.
Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting

Page 10 GAO-03-365SP 

projected. Revenue declines are generally attributed to factors such as the 

economic downturn, the steep stock market declines, the events of 

September 11, 2001, and tax cuts in certain states. 

In response, 37 states reduced their fiscal year 2002 budgets by over $12 

billion. This shortfall translated into reductions in aid to local governments, 

hiring and salary freezes, cuts in infrastructure projects and discretionary 

programs aimed at low-income individuals and families, and even acrossthe-board spending reductions. Many states have also taken other actions 

like tapping “rainy day funds,” using tobacco settlement funds, or raising 

“sin” taxes. Further, as states have exhausted many of their options, they 

are now faced with taking more dramatic actions to balance their budgets, 

such as reductions in entitlement coverage and income tax increases. For 

fiscal year 2004, projections released by the National Association of State 

Budget Officers (NASBO) suggest that states will face a fiscal gap of over 

$80 billion. 

Participants’ Discussion Participants agreed that fiscal stress on all levels of government are 

greatest during periods of economic downturn like the current one, when 

revenues are down. Participants noted that the current economic downturn 

has been even worse than past ones—perhaps the most severe in the 

postwar period. While increased spending demands and declines in 

revenues are being felt at every level of government, some participants 

observed that state and local governments do not have the flexibility to 

weather a downturn like this one because, unlike the federal government, 

many are precluded from having an operating deficit. 

Near-term Fiscal Stress Some participants observed that recent fiscal stress has undermined the 

ability of states and localities to uphold their share of the 

intergovernmental partnership in key policy areas in which the federal 

government has a stake, including Medicaid, education, discretionary 

programs for low-income individuals and families, and infrastructure 

projects like roads, bridges, and improvements in public buildings. This has 

repercussions not only for state and local governments’ ability to help the 

federal government achieve national goals but also for those vulnerable 

populations that rely on government for needed assistance and services. 

Some participants further recognized that actions taken by states and 

localities to close deficits—tax increases and deep spending cuts—could 

serve to undermine an economic recovery overall, thereby offsetting at 

least some of the economic stimulus provided by other federal fiscal and 

monetary policy actions.
Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting

Page 11 GAO-03-365SP 

While most participants acknowledged the severe effects of the economic 

downturn on state and local budgets, some pointed out that certain state 

and local choices during prosperous economic periods significantly 

contributed to their current budget crisis. Although in recent years states 

have tried to build up reserves and “rainy day funds,” they also made 

choices, such as cutting taxes and increasing spending, during the 

prolonged economic boom of the 1990s. For example, between 1990 and 

2000 state spending grew twice as fast as federal domestic spending. Once 

the economic boom was over, some participants noted that the tax 

structures and spending commitments they had entered into were no 

longer sustainable. States have quickly used up much of their savings and 

are taking or contemplating even more dramatic actions, such as increasing 

income taxes and reducing spending levels, even in entitlement programs. 

Some participants noted that states would not be in as serious a crisis 

today if they had resisted pressures for large tax cuts and spending 

increases and saved more during the 1990s. One participant observed that 

states would have needed much larger reserves than they accumulated to 

avoid deficits stemming from a downturn similar to that faced in the early 

1990s—a downturn which now seems less severe in its fiscal impact than 

the current period. 

Participants also commented that the federal government has contributed 

to the fiscal challenges of state and local governments by placing greater 

responsibilities on them for achieving national goals and objectives. For 

example, state and local governments are now being asked to improve 

educational performance to meet national standards and enhance 

homeland security preparedness. In addition, they are responsible for 

paying for the rising costs of health care and long-term care needs for the 

aged and disabled through Medicaid. For example, a participant observed 

that Medicaid has grown from about 10 percent of total state budgets in 

1987 to 20 percent today. Additionally, several participants observed that 

recent federal tax cuts could further diminish the tax bases of other 

governments, particularly states, since most states’ tax bases are linked to 

the federal tax base.

Policy Options Following the participants’ discussion about the nature and causes of the 

mismatch between spending and revenues in periods of economic 

downturn, participants talked in detail about options for addressing a 

mismatch. Many participants discussed the need for short-term federal aid 

to help the state and local sector weather this downturn. However, it was 

also recognized that states and localities can do their share in the future by 

building up “rainy day funds” and constraining unsustainable tax cuts and 
Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting

Page 12 GAO-03-365SP 

spending increases, and working towards greater economy and efficiency 

across programs during healthy economic periods. 

Participants then discussed specific actions that the federal government 

could take to assist states in remedying any fiscal mismatch. A key option 

discussed centered on federal financial aid during economic downturns. 

Participants noted that federal aid would help implementation of state and 

local intergovernmental programs while also reducing the likelihood that 

states would make spending and tax choices that might undermine federal 

efforts to revive the economy. 

Participants then offered a few examples of the form that such aid could 

take. Examples mentioned included an enhanced federal Medicaid 

matching share and greater funding for homeland security preparedness. 

Others discussed a form of general revenue-sharing or countercyclical aid 

to be available during economic downturns. According to a few 

participants, key considerations that probably would need to be addressed 

prior to creating any countercyclical aid or general revenue-sharing 

program include: 1) the triggers for starting and ending the aid, 2) the 

formulas used to distribute the aid, 3) the conditions, if any, to be attached 

to the aid, and 4) the overall level of support to be provided. 

Most participants also acknowledged that increased federal assistance 

would likely result in larger federal deficits. While it is generally agreed that 

running deficits during downturns is not harmful to the economy in the 

near future, they noted that the federal government may find it difficult to 

limit increased aid to the period of economic downturn. In addition, a few 

participants worried that setting a precedent for federal aid could create a 

disincentive for states and localities to save for rainy days when the 

economy is strong. In response, one participant noted that a condition of 

federal aid could be that states would be required to have significant “rainy 

day funds” or reserves before triggering financial aid. 

Longer-term Structural Factors The symposium discussion then moved to longer-term structural factors 

that could also be contributing to the fiscal mismatch between spending 

and revenues. Most participants acknowledged that structural long-term 

forces, such as changes in the global economy and the aging of the 

population, are in part responsible for the mismatch that states are 

experiencing. For example, the aging of the population will create 

significant demands for Medicaid long-term care services, placing 

increasing fiscal pressures on states’ ability to fund their share of the 

program. On the revenue side, state revenue systems have not kept up with 
Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting

Page 13 GAO-03-365SP 

rapid technological developments in the economy. State sales taxes in 

particular do not adequately capture services—the largest growth sector of 

our knowledge-based economy—nor do they effectively tax the increasing 

numbers of Internet and mail order sales. States have also faced challenges 

in capturing income generated by increasingly global corporations. 

The current intergovernmental grant system was another structural factor 

that participants identified. This system is largely categorical in nature as 

most funds are provided through defined programs offering little flexibility 

for adapting to unique state and local needs. Some participants argued that 

federal grants are not always provided in areas where state and local 

spending needs are greatest or funding gaps are most serious. It was 

further noted that the trend in favor of categorical grant programs is not 

exclusive to the federal government, as state policy makers have shown a 

tendency to do the same thing with regard to grants to local governments. 

(For more information on federal grants, refer to app. V.)

Some participants then debated the pros and cons of consolidating the 

hundreds of categorical grants into a series of block grants in several policy 

areas related to the core services of government. Some state and local 

interests contend that they would accept greater accountability 

requirements, such as national performance goals, from the federal 

government in exchange for greater funding flexibility. Major areas 

identified as possible targets for consolidation include education, health 

care, employment and training, the environment, and physical 

infrastructure. However, other participants expressed concern about block 

grants as past experiences have shown that increased state and local 

flexibility has often been accompanied by federal funding cuts. The 

Congress also tends to provide less funding for these broader purpose 

programs over time. For example, the consolidation of several categorical 

grants into the social services block grant in the 1980s resulted in an overall 

decrease in total funding to states for those services. 

Other participants raised concerns about whether block grants could 

constrain the federal government’s oftentimes legitimate need to fill gaps in 

areas where state and local governments have not been providing sufficient 

funding. One example offered centered on federal education funding, 

which had been largely targeted at low-income and special needs students 

while state and local education funding for the most part was aimed at the 

general student population. 
Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting

Page 14 GAO-03-365SP 

One participant highlighted the emergence of a new model for 

intergovernmental grants, referred to as performance partnerships. As 

implemented by agencies like the Environmental Protection Agency, the 

goal of a performance partnership is to provide states with greater 

flexibility in shifting federal funds among categorical programs while 

establishing more rigorous state accountability for federal performance 

goals and measures. 

Participants emphasized that solutions to these challenges need to be 

addressed collaboratively. Earlier in the day, David Broder of the 

Washington Post framed this critical issue in his introductory remarks. 

(See app. III for a summary of the introductory remarks.) In his view, the 

fiscal policy making process at the national level has a fundamental 

weakness: even though actors at all levels of government are increasingly 

focusing on common goals and jointly funding and implementing programs, 

decision making still proceeds along compartmentalized lines. Specifically, 

Mr. Broder said the federal government frequently acts in isolation of state 

and local needs and impacts, often taking credit for new benefits while 

shifting costs and burdens of making hard fiscal choices to states and 

localities, who operate under more constrained fiscal rules. Accordingly, 

many participants agreed with Mr. Broder that a forum is needed in the 

national fiscal debate where officials at all three levels of government can 

have serious, collective, and ongoing discussions about national goals and 

resources. 

2. Intergovernmental 

Financing of Health 

Care, Particularly 

Long-term Care for the 

Elderly and Disabled

Background The division of responsibility between federal and state governments for 

the health and welfare of citizens has traditionally differed for particular 

clientele. The federal government has been primarily responsible for 

assistance and health care for the elderly and the disabled through 

programs like Medicare, Social Security, and the Supplemental Security 

Income. Financing and administering programs targeted at children and 
Appendix II

GAO’s Symposium on Addressing Key 

Challenges in an Intergovernmental Setting

Page 15 GAO-03-365SP 

families have largely been a shared responsibility between federal and state 

governments.

These established roles have become blurred under the Medicaid program. 

Although the program is widely perceived as providing health care for lowincome families and children, in recent years the program has become the 

main source of financing health and long-term care for the elderly and 

disabled—over 60 percent of Medicaid spending is now devoted to care for 

these groups. The program has also assumed responsibility for financing 

the Medicare premiums for low-income elderly (known as dual eligibles). 

Eighty-two percent of projected Medicaid expenditure growth reflects 

increases in the cost of caring for aged and disabled beneficiaries, and 

states share this burden with the federal government, paying an average of 

43 percent of the total costs. 

The burden of funding health and long-term care for the aged and disabled 

has been growing as a share of both federal and state budgets. For 

example, Medicaid spending already comprises a large portion of most 

state general fund expenditures–an average of 15 to 20 percent. In the short 

term, spending growth has been fueled by factors such as overall health 

care cost growth, particularly in prescription drugs, and increasing costs of 

long-term care services. In response, most states have either taken or are 

now contemplating a mix of cuts in Medicaid coverage, increased 

copayments, and eligibility reductions. In the future, demand for Medicaid 

services, particularly long-term care, will grow even more as Baby Boomers 

begin to age. As a result, Medicaid is expected to encompass even higher 

percentages of federal and states budgets—estimates show Medicaid will 

be approximately 26 percent of states’ total budgets in 5 years and 33 

percent 10 years from now.3

 (See fig. 2.) The President’s Fiscal Year 2004 

budget proposes new flexibility for states in serving nonmandatory 

Medicaid populations—federal funds would be increased in the near term, 

but the open-ended federal commitment for financing Medicaid would be 

capped. The impact of this proposal on state budgets and health care 

services is being debated. 

3

National Association of State Budget Officers September 2002 estimates.
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Figure 2: State Spending by Function as a Percent of Total State Spending After 1, 5, and 10 Years

Note: Assuming current growth rate for Medicaid and current average growth for all other categories.

Health care spending creates stress at the federal level as well. Combined 

federal/state spending for Medicaid grew at an annual average of 11 percent 

between 1980 and 2000. Over the longer-term, federal spending on health 

care will be the fastest growing element of spending—federal outlays for 

Medicare and Medicaid are projected to nearly triple as a share of GDP 

over the next 75 years. 

Participants’ Discussion This discussion began with the majority of participants emphasizing 

concern over Medicaid spending growth. Specifically, everyone was in 

agreement that Medicaid spending has grown rapidly in the past 2 years 

and will continue to do so because of rises in costs related to health care 

services, particularly prescription drugs, and greater demands for longHigher education

Transportation

Corrections

3.7%

Public assistance

2.2%

Medicaid

20.8%

All other

3.4%

2.0%

26%

20.6%

18.3%

33.6%

1.8%

3.1%

After 1 year After 5 years After 10 years

21.8%

Source: National Association of State Budget Officers.

31.6%

8.8%

29.2%

Elementary and secondary education 

26.5%

8.1%

7.3%

11.2%

10.5%

9.4%
Appendix II

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term care. Moreover, it was noted that other national trends, such as the 

aging of the population and the retirement of Baby Boomers, would create 

even greater demands for health and long-term care services over the next 

several decades, and consequently drive spending upward. There was 

unanimous agreement that funding health care costs for a growing aging 

population is clearly one of the biggest shared challenges for all levels of 

government and that the country is on the cusp of a crisis in health care 

and long-term care. 

There was general agreement that states are not well positioned financially 

to meet the future demands related to Medicaid, and that current 

arrangements may not be sustainable in the future. While all levels of 

government will be faced with very large health and long-term care 

demands once the Baby Boomers retire and age, there was general 

agreement that the burdens will fall heavily on states. Participants 

observed that this not only has consequences for states but for 

beneficiaries of the program. Due to state balanced budget requirements, 

program benefits and policies will be affected by cyclical fiscal shocks 

which will prompt episodic series of cuts, constraints, tax increases, and 

cost shifts to providers and beneficiaries. Indeed, all participants agreed 

that we are seeing this now. For example, many states have lowered 

payment rates to providers, eliminated optional services like dental care, 

and tightened eligibility requirements. 

As a result, participants agreed there is a pressing need to reevaluate 

intergovernmental financing of health care for the disabled and aged, who 

account for the majority of costs. Several participants representing state 

governments argued that if the federal government took over responsibility 

and related costs for Medicaid long-term care, this alone would address the 

states’ fiscal problems, allowing states to more easily finance most other 

spending priorities. The same participants justified this argument by 

observing that funding states’ share of Medicaid long-term care costs is 

clearly the biggest spending demand in the future, as it will increasingly 

absorb state resources. 

Other less daunting options for assisting states in financing health and longterm care for the aged and disabled were also presented by some 

participants. One option discussed was increasing flexibility in grants to 

help states better tailor funds for the particular needs of their aged and 

disabled populations. Another option advanced by a few participants 

involved enhancing the federal share of Medicaid matching funds on a 

temporary or permanent basis. 
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Financing the long-term care of the aged and disabled constitutes a longterm fiscal challenge that will increasingly destabilize the finances of all 

levels of government in our system. While participants concluded that 

current financing arrangements have created unsustainable fiscal burdens 

for the states, they also acknowledged that increasing federal fiscal 

responsibilities would add further stress to the longer-term federal budget 

outlook that is already confronted with the burdens of sustaining funding 

for Medicare, Social Security, as well as its current share of Medicaid. 

Accordingly, participants agreed that this situation calls for a serious 

dialogue involving stakeholders from all levels of government regarding the 

appropriate roles of governments in caring for the aged and disabled.

3. Current Tax 

Structures at All Levels 

of Government and 

Interrelationships 

Between Them

Background The revenue challenges facing state and local governments stem from 

cyclical fluctuations in the economy, which states historically have been 

able to overcome, as well as long-term structural characteristics. These 

problems could serve to undermine the longer-term fiscal viability of state 

and local revenue systems in a global economy. In the short term, the 

economic downturn has resulted in the rapid decline in revenue from 

taxation on personal income, corporate profits, and capital gains. Further, 

the forces that drove income and economic growth may not be repeated on 

the scale of the late 1990s. Similarly, the federal government has 

experienced quick declines in tax revenues (see fig. 3).
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Figure 3: Federal and State Revenue Trends

In addition, certain long-term structural forces are serving to erode the 

traditional revenue bases of states. State and local sales taxes, for instance, 

are levied on the retail sales of products. However, as the service economy 

grows as a share of total revenues, the economy of the 21st century is 

increasingly geared toward providing services that are not captured by the 

sales tax in most states. States also have difficulty imposing this tax on the 

growing market of remote sales from mail orders or the Internet. Because 

of the complexity of dealing with thousands of taxing jurisdictions each 

with its own tax rates and base, the U.S. Supreme Court has held that, 

absent authorization from the Congress, state or local governments cannot 

require out-of-state vendors to collect sales or use tax unless the vendor 

has a physical presence in the state. Buyers are actually required to pay 

sales taxes directly to their states, but they rarely do and the policy is 

effectively not enforced. While no one has developed a reliable estimate of 

-15

-10

-5

0

5

10

15

1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1

State tax revenue

Federal revenue

Source: State tax revenue from Rockefeller Institute/NASBO. Federal revenue from Bureau of Economic Analysis, 

Department of Commerce.

Real year-over-year quarterly percent change
Appendix II

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the amount of tax revenue losses on all remote sales, the losses will 

increase as remote sales increase. Moreover, states face growing 

difficulties in tapping sources of individual and corporate income—as 

financial transactions and corporations have become more global. 

State and local governments have taken some actions to modernize and 

coordinate their tax systems. For example, the Streamlined Sales Tax 

Project has laid the foundation for coordinating sales tax administration 

and methods of collection across the nation. This project is intended to 

simplify and make the sales and use taxes more uniform for all types of 

retailers by providing common definitions across states. If states simplify 

and standardize their tax systems, this could reduce the administrative 

burden of tax collection on remote vendors, and may help facilitate 

congressional action to provide states with the authority to require remote 

vendors to collect the sales tax. 

Participants’ Discussion Participants agreed that there is a pressing need to look at the tax 

structures of all three levels of government collectively, and for policy 

makers at all levels to better understand the relationships between them. 

They agreed that the U.S. economy is becoming increasingly 

interconnected and global as American companies conduct business across 

state and national boundaries. Economic globalization creates a need for 

greater legal, financial, and regulatory uniformity among units of 

government within and outside the United States. 

Participants representing state and local interests worried that the effects 

of the global economy place states and localities in a precarious position, 

driving greater centralization of authority at the federal level, and eroding 

available state and local revenues. Currently, industries must deal with a 

patchwork quilt of state and local tax systems and regulatory policies, 

which impede the ability of multinational and interstate businesses to 

operate efficiently and effectively across jurisdictions. Economic 

globalization has spurred efforts by business to promote greater legal, 

financial, and regulatory uniformity among units of government. The 

federal preemption of Internet sales taxation is but one example of a 

growing trend affecting many areas of state and local authority. 

Accordingly, the key question considered by most participants was what 

redesign of our tax structures is appropriate for the modern economy so 

that the needs and interests of states, localities, and the federal government 

are respected?
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A basic problem raised by most participants is that changes in the global 

economy have made the design of current tax systems increasingly 

obsolete. Specifically, the fragmented sales tax system is not designed to 

capture services, the biggest growth sector of our knowledge-based 

economy, nor can it effectively tax a significant portion of sales made by 

remote sellers through the Internet or mail orders. 

For the most part, participants agreed that some tax reform is needed at 

the state and local levels, stating that some standardization of tax policy 

across states should be on the table. Participants representing state and 

local interests pointed to the Streamlined Sales Tax Project as a move in 

the right direction—one that responds to the demands of the global 

economy. If adopted by the states, the project promises to reduce burdens 

experienced by national and multinational businesses by harmonizing sales 

tax bases, rates, and rules across the states.

Because most state tax systems are closely linked to the federal tax code, 

participants felt that federal policy makers also need to better address the 

effects of any tax-related decisions on other levels of government. 

Specifically, due to the linkage of federal and state income tax bases, 

changes made by the federal government to reduce taxes could also serve 

to reduce state tax revenues. Some participants noted that in recent years 

federal tax policy changes have been made without adequately considering 

the effects on state and local governments. According to some participants, 

states have already felt the negative impacts from recent tax policy 

changes, which have exacerbated their current fiscal crisis. Although state 

tax bases can decouple from the federal tax base, this would likely increase 

enforcement burdens for the states and compliance burdens for taxpayers. 

Participants argued that no forum or formal mechanism exists for federal 

policy makers to consider the impact of their own tax policies on state and 

local tax systems. One participant suggested establishing a formal process 

for estimating the effects of proposed federal tax policy changes on state 

and local governments. 

On a final note, participants related that in many instances the taxing 

authority at the state and local levels also has been restricted by either the 

legislature or the public through voter initiatives. This situation has put 

policy makers in a bind in responding to fiscal crises. In states with tax 

limitations, one of the few options during this downturn is to cut program 

services at a time when those most in need are even more vulnerable. 

Participants observed that there is a strong antitax, antigovernment feeling 

among a large segment of the population and this sentiment needs to be 
Appendix II

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reflected in the dialogue about intergovernmental issues, particularly with 

regard to the ability of state and local governments to fund their shares of 

intergovernmental programs. One participant suggested that public 

officials at all levels of government need to better understand why the 

public has these feelings and attempt to address the root causes of public 

disaffection with government.

4. Consider 

Reassessing the 

Assignment of 

Responsibilities

Background In recent years, state and local interests have reported that their program 

and fiscal responsibilities are not matched with adequate resource 

capacity. State and local governments have assumed many new program 

responsibilities in areas such as education, health care, welfare, and 

homeland security. At times, states have assumed added responsibilities 

through greater devolution of federal programs; other new responsibilities 

have come in the form of mandates and other requirements placed upon 

them by the federal government. Welfare reform is a key example of 

devolution, in which states lobbied for and received significant new 

authority to implement innovative and tailor-made approaches to training 

and employment. States have also sought and received greater program 

responsibility and flexibility from the federal government through program 

waivers—particularly in Medicaid and the State Children’s Health 

Insurance Program. 

At the same time, many new responsibilities have been placed upon states 

and localities by the federal government. For example, within the past 2 

years, the federal government has required states and localities to begin 

meeting new educational standards, carry out significant upgrades to 

voting systems, and improve their ability to respond to public safety 

threats. To carry out these program responsibilities effectively, state and 

local governments must have substantial administrative capacity—e.g., 

adequate information technology systems and staff with sufficient skills—

in addition to fiscal resources. While states and localities have improved 

their administrative capacity over the past several decades, there are still 

major capacity differences among these governments. Further, the recent 
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economic downturn and related reductions in revenue collections, as well 

as long-term forces, such as globalization, that are reducing some state and 

local tax bases, could challenge their ability to carry out their current and 

added responsibilities. 

Some students of the federal system have observed that each level of 

government has unique comparative advantages over certain kinds of 

service and program areas. Paul Peterson, for instance, suggests that 

intergovernmental competition gives states and localities incentives to 

reduce tax and regulatory burdens to attract stronger tax bases.4

Accordingly, state and local governments arguably have strong incentives 

to promote education and economic development programs that can 

enhance prospects for local investment in their economies. However, this 

argument also suggests that competition may undermine state and local 

support for other policy areas, such as social welfare, in which strong 

government programs could be viewed as discouraging economic activity 

and growth. 

Some observers believe that the growth of federal roles and responsibilities 

over time has blurred these distinctions. The federal government has come 

to subsidize and influence traditional areas of state and local control such 

as education and criminal justice, while also mandating increasing state 

and local fiscal responsibilities for such social welfare areas as health and 

long-term care. The result is the intergovernmentalization of nearly every 

domestic responsibility, which has prompted tensions across governments 

and confused accountability for program results. Observers like Alice 

Rivlin have proposed a sorting out and reallocation of intergovernmental 

roles and responsibilities.5

 Under this scenario, state and local 

governments would assume primary responsibility for areas where they 

enjoy a comparative advantage—such as education and housing—while the 

federal government would assume national responsibilities for policies and 

financing for areas, such as health care, to better promote national 

standards and services. 

4

Paul E. Peterson, The Price of Federalism (Washington, D.C.: The Brookings Institution, 

1995). 

5

Alice Rivlin, Reviving the American Dream (Washington, D.C.: The Brookings Institution, 

1992).
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Participants’ Discussion Across the board, participants were in agreement that state and local 

governments have assumed a growing number of new program 

responsibilities, and simultaneously the funding burdens that accompany 

them. While states and localities have assumed some program 

responsibilities by choice or by agreement with federal policy makers, 

participants also identified what they saw as a troubling trend. Specifically, 

they stated that in recent years the federal government has continued to 

mandate costly new responsibilities on state and local governments, by law 

or regulation. Participants quickly agreed that there is a definite disconnect 

between the responsibilities that state and local governments have in key 

program areas and the fiscal and administrative resources needed to carry 

out those responsibilities. In addition, participants emphasized that along 

with these mandates comes the requirement that states and localities bear 

the responsibility of achieving national goals and priorities. Some 

participants summed up this phenomenon as national dominance without 

direct national delivery. 

According to many participants, the disconnect between responsibility for 

achieving national goals and needed resources is most pronounced in 

policy areas such as education; health care for the poor, aged and disabled; 

and homeland security. The main problem, according to some participants, 

is that the federal government has not given states and localities adequate 

funding to achieve federally imposed responsibilities and expectations in 

such critical policy areas. Accordingly, states and localities are increasingly 

being forced to choose between using scarce resources to achieve national 

goals as mandated by the federal government and funding their own local 

policy priorities. As a result, local priorities often get crowded out in a 

system where federal or national goals encumber a growing share of state 

and local budgets. Further, many participants observed that while the 

disconnect between resources and responsibilities is largely structural in 

nature—too many responsibilities that are not matched with a sufficient 

revenue base or enough federal funding—it has been exacerbated by the 

current, prolonged fiscal crisis. 

The participants’ discussion addressed the capacity of the state and local 

sector to carry out these national responsibilities. Some participants noted 

that fiscal and administrative capacity continues to vary widely across 

states and localities, resulting in varying degrees of program performance, 

quality of service delivery, and level of services provided. Many noted that 

the current fiscal crisis has added to this problem as state and local budget 

cuts undermine their administrative capacity and services—e.g., hiring and 

salary freezes and cuts in technology improvements. A few participants 
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argued that effective and consistent implementation of national goals and 

intergovernmental programs could be promoted by federal initiatives to 

help overcome disparities in fiscal and administrative capacity among state 

and local governments. 

Participants indicated that the mismatch between responsibilities is 

greatest at the local level. They observed that, over the past 15 years, 

county and city government responsibilities have expanded. Mandates 

from both the federal and state governments have hit local governments 

the hardest and they often have the least fiscal and administrative capacity 

or authority to address them. Further, some participants observed that the 

increased responsibilities of local governments have not been met with 

increased financial support from either the federal or state governments, or 

added authority to raise revenues. Most participants agreed that policy 

makers at the federal and state levels must find a better way to balance 

differences between local governments, and recognize the particular 

challenges faced by those jurisdictions with the least resources and the 

weakest tax bases. 

The District of Columbia was highlighted as a vivid example of the many 

fiscal and administrative capacity concerns that had been raised by 

participants throughout the day. From a city’s perspective, states have all 

the power, the federal government has all the money, and cities have all the 

problems. Participants observed that there are major variations in fiscal 

and administrative capacity among local governments in the Washington, 

D.C. metropolitan area. These same participants discussed the unique 

needs of the District of Columbia, indicating that it must carry out state and 

local responsibilities, as well as the challenges associated with being the 

Nation’s capital. The District is uniquely constrained because it has city and 

state responsibilities without full state autonomy or revenue-raising 

authority, along with bearing the challenges of being the capital city.6

Another increasingly prominent trend—preemption of state and local 

authority—was identified among participants as being especially 

problematic and placing state and local governments in a precarious 

position (see fig. 4). The most striking example is related to the federal 

restriction on Internet taxation. Further, participants noted the growth of 

federal preemption across a wide range of traditional state and local 

6

GAO plans to issue a report on the structural fiscal issues of the District of Columbia in May 

2003. 
Appendix II

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functions varying from health care to law enforcement. Some participants 

attributed increasing federal preemption to the demands of the global 

economy for greater regulatory uniformity.7

Figure 4: Number of Federal Preemption Statutes Enacted Per Decade

Participants concluded by discussing options for addressing the mismatch 

between the resources and responsibilities of state and local governments. 

One option that generated a lively discussion was sorting out 

intergovernmental functions, in light of growing concerns about fiscal and 

management capacity. Alice Rivlin’s proposals, as laid out in Reviving the 

American Dream, were suggested as a possible basis for such a sorting out 

7

See U.S. General Accounting Office, Regulatory Programs: Balancing Federal and State 

Responsibilities for Standard Setting and Implementation, GAO-02-495 (Washington, D.C.: 

March 20, 2002) for more background on regulatory programs.

130

120

110

100

90

80

70

60

50

40

30

20

10

0

Before

1900

1900-

1909

1910-

1919

1920-

1929

1930-

1939

1940-

1949

1950-

1959

1960-

1969

1970-

1979

1980-

1989

1990-

1999

Year

1999

est.*

Number

Civil Rights and other

Health, safety, and environment

Commerce and transportation

Banking, finance, and taxation

Source: U.S. Advisory Commission on Intergovernmental Relations, Federal Statutory Preemption of State and Local Authority: History, Inventory, and Issues (Washington, D.C., 1992), p.7.
Appendix II

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of responsibilities. Along these lines, the participants talked about making 

health care a federal responsibility and delegating other responsibilities, 

such as education and physical infrastructure, entirely to states. However, 

most participants warned that any attempts at sorting out should be taken 

slowly and tested in certain policy areas. Some noted that the tradeoffs 

associated with broad sweeping realignments are complex and prompt 

deep concerns and resistance among many stakeholders. 

Participants suggested that long-term care would be a good candidate for 

sorting out roles and responsibilities. The growing demand and costs for 

these services have been major drivers of state fiscal stress. Moreover, the 

cyclical nature of state budgeting subjects long-term care, along with other 

state funded services, to episodic cuts during economic downturns. 

Benefits and service levels vary significantly across the nation, reflecting 

the primary role played by states in determining program policies. 

While diversity and choice are the hallmarks of a vital federal system, an 

increasingly aging nation may come to place a higher value on uniformity 

and standardized benefits for long-term care across the nation. For social 

security and disability programs, financing and delivery of benefits has long 

been a primary federal responsibility, reflecting national expectations for 

uniform treatment for these potentially vulnerable populations. If the 

federal government assumes greater responsibility for financing long-term 

care, it may also be necessary to rethink current federal responsibilities for 

financing other programs delivered by state and local governments in order 

to free up sufficient resources at the national level. 

One participant observed that, in the early 1980s, states had the 

opportunity to achieve such a fundamental resorting of roles—when the 

federal government offered to assume full financial responsibility for 

Medicaid in exchange for states taking on welfare (known as “Swap and 

Turnback”). States rejected this offer and many participants representing 

state governments indicated that they now regret this decision. 

Participants agreed—at the very least—that more intergovernmental 

coordination and collective policy making are necessary so that key policy 

decisions are not made in isolation, and policy makers understand the 

burdens that their actions might place on the fiscal and administrative 

capacity of another level of government. This call for greater coordination 

and collaboration is a theme that ran throughout the day and underscores 

all of the top intergovernmental challenges. 
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Discussion of Need for 

an Ongoing Dialogue 

and Possible 

Framework

A significant portion of the day focused on a perceived need raised by all 

participants regarding the lack of a focal point and forum for a 

comprehensive discussion of intergovernmental issues. Participants 

generally agreed that since the demise of the Advisory Commission on 

Intergovernmental Relations (ACIR) there has been a void in this area. 

Background ACIR was an independent intergovernmental agency established in 1959 to

improve the ability of federal, state, and local governments to work 

together cooperatively, efficiently, and effectively. ACIR was created with a 

recognition that each level of government had an important and distinct 

role to play in formulating and administering policies. It was comprised of 

appointed and elected officials from all three levels of government. The 

ACIR was charged with several responsibilities: to bring together 

representatives of federal, state, and local governments to address 

common problems; to provide a forum for discussing the administration 

and coordination of federal grant programs; to provide research and make 

recommendations to the executive and legislative branches on the 

allocation of government functions; and to recommend methods of 

coordinating and simplifying tax laws and administrative practices to 

achieve a more balanced relationship between the levels of government. 

Over the years, ACIR conducted research on a variety of subjects related to 

the federal, state, and local governments. For example, it studied and 

commented on law enforcement, transportation policy, welfare, and 

environmental protection, as well as a host of other policy issues. 

Throughout the 1980s, congressional support for the ACIR declined for a 

number of reasons. The loss of consensus on many policy issues and the 

federal budget deficit were among the factors contributing to loss of 

support in the Congress. Several controversial reports in the 1990s 

heightened calls for its termination and it was abolished in 1996. 

Participants’ Discussion Most participants agreed that there is a need for a national focal point to 

address intergovernmental issues. They observed that the biggest void has 

been in the lack of consistent data collection and analysis. ACIR used to 

collect data and publish results regularly on state and local fiscal policies 

and conditions. According to participants, sophisticated analysis of policy 

issues from an intergovernmental perspective is also sorely missed. For 

example, an institutional focal point could help policy makers sort through 

issues and options for federal aid to states during downturns; such a focal 
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point could also highlight the intergovernmental implications of federal tax 

policy changes. 

Some participants observed that some organizations within specific policy 

sectors perform intergovernmental coordination, but it tends to be on an 

issue-or program-specific basis. For example, the Environmental Council 

of States, the National Association of State Child Care Administrators, and 

the National Association of Medicaid Administrators frequently meet with 

their federal counterparts. However, participants commented that the 

primary focus of these meetings is not policy research, rather the goal is 

usually to better understand each other. Broader based organizations such 

as the National Governors Association and the National Council of State 

Legislatures represent state interests, but the primary focus of these 

organizations is not necessarily to produce systemic research for a national 

audience. 

Participants also discussed what form such an organization could take. 

Time limitations did not allow for a full discussion of the form and 

structure of such a focal point. Participants noted the importance of 

avoiding some of the difficulties ACIR encountered. For example, it 

became increasingly difficult for ACIR to reach bipartisan consensus on 

issues with its members and encourage active participation by high-level 

federal officials. 

Participants contended that, under any circumstance, an essential 

component of a future organization would be to ensure it has a 

constructive working relationship with state and local interest groups and 

others on the front lines of state and local governments. According to 

participants, a strong analytical function is also a critical component and it 

was agreed that a body of talented analysts could provide legitimacy to 

intergovernmental issues. Participants also acknowledged that the 

challenge is how to obtain consistent data and a framework for analysis, 

and how to fund these efforts. Any organization would likely need 

sustained financial support from federal, state, and local or private sources. 

Moreover, some argued that continuing federal involvement is critical to 

promote a full intergovernmental forum and national attention to the issues 

raised. 

There was disagreement among participants about whether there is a 

sufficient demand at the federal level to create and sustain any forum. 

According to some participants, while an intergovernmental focal point is a 

good idea in theory, in practice it is difficult to generate interest at the 
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federal level. They observed that these issues would need congressional 

sponsorship to get attention. They argued that even without a coordinating 

forum, states had some influence on federal policies in the 1990s in the 

areas of welfare reform, the tobacco settlement, transportation, and 

unfunded mandates reform. 

Despite their concerns about prospects for support, participants for the 

most part agreed that a new intergovernmental focal point is needed. 

Participants observed that the format of such a forum, as well as ways to 

generate interest among policy makers, should be the focus of future 

discussions among leaders at all levels of government. 

In addition, there was unanimous agreement that homeland security is a 

great opportunity to start this kind of a dialogue across levels of 

government. They observed that policy makers appear to be serious about 

the need to enhance federal, state, and local operations to improve 

homeland security. Homeland security provides an excellent example of 

where effective coordination among all levels of government is literally a 

matter of life or death. Because the nation relies on local governments as 

the first line of defense, the challenge is to construct financial and 

administrative relationships to promote improved local protection 

initiatives consistent with national goals and threats. It was noted that 

achievements made on this front could spill over into other policy areas. 
Page 31 GAO-03-365SP 

Appendix III

Summary of Introductory Remarks ApendxiI

Comptroller General David M. Walker opened the symposium and spoke 

about challenges facing all levels of government and the private sector. Mr. 

Walker began by outlining several long-term trends that will create shared 

challenges for all levels of government. Examples of these trends, which 

are laid out in GAO’s strategic plan framework, include the aging of the 

population, new and diffuse security threats, and globalization. 

Furthermore, Mr. Walker provided an overview of fiscal trends from the 

federal perspective and described the changing composition of federal 

spending over the past 40 years, noting the growth of mandatory social 

security and health programs as a share of federal spending. Looking 

ahead, he noted that projected increases in mandatory spending for Social 

Security, Medicare, Medicaid, and Net Interest will prompt unsustainable 

federal deficits, absent reforms to the spending or revenue sides of the 

budget. 

Since many of these fiscal challenges are shared by states in our system, 

initiatives to address these future pressures need to be pursued in an 

integrated and collaborative fashion. Whether it be health care reform or 

homeland security, our future policy decisions should be framed as 

national, rather than strictly federal, responses to problems and issues. Mr. 

Walker observed that such a collaborative approach can be informed by a 

series of key national indicators designed to measure the nation’s overall 

position and progress and the role of various governmental actors involved 

in key policy areas. He concluded that partnerships between levels of 

government are needed to address the common problems we all share, and 

all tools of government should be considered in implementing these 

partnerships. 

David Broder, a columnist for the Washington Post and keen observer of 

the nation’s political scene, began his comments by noting a striking 

disjunction between dialogue on federal fiscal issues and the dialogue on 

state fiscal issues. Both issues seem to be treated as separate and distinct 

in the press and among political leaders whereas, in his view, the issues are 

closely intertwined. He said that while federal decision makers enjoy the 

privilege of enacting new benefits and programs for their constituents, 

state and local decision makers are left with the hard choices of raising 

taxes or reducing spending to implement them. Compounding these 

pressures, revenue systems at the state and local level are constrained—

the sales tax is being eroded by the Internet and the service-based 

economy, while raising income taxes is not politically palatable. Moreover, 

while state and local decision makers are faced with some hard choices to 

solve their fiscal crises, he claimed that many recent federal fiscal 
Appendix III

Summary of Introductory Remarks 

Page 32 GAO-03-365SP 

decisions may have done more to worsen states’ fiscal conditions than to 

provide any fiscal relief. 

Mr. Broder said he is sure that states and cities will need federal help to get 

through their current fiscal crises but wondered if they have enough 

leverage in Washington to get the federal support they will need. Many 

representatives of state and local interest groups have told him it is more 

difficult than it has been in many years to get the attention of the Congress 

or the administration on issues vital to state and local interests. Mr. Broder 

lamented the absence of an institutional forum in which overall (federal, 

state, and local) resources could be measured against national priorities. 

Mr. Broder called for new partnerships to address the fiscal 

interrelationship among the levels of government and the need to work 

together to address the key challenges facing the nation. 
Page 33 GAO-03-365SP 

Appendix IV

Intergovernmental Relations Symposium Slide 

Presentation ApendxiIV

November 20, 2002

GAO

INTERGOVERNMENTAL

RELATIONS SYMPOSIUM

Addressing Key Challenges in an Intergovernmental 

Setting
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 34 GAO-03-365SP 

COREVALUES

Fiscal 2002-2007

Health care needs and financing

Education and protection of children

Work opportunities and worker 

 protection

Retirement income security

Effective system of justice

Viable communities

Natural resources use and 

 environmental protection

Physical infrastructure

Address Current and Emerging Challenges to the Well-Being and Address Current and Emerging Challenges to the Well-Being and 

Financial Security of the American People Financial Security of the American People related to . . . related to . . .

Diffuse security threats

Military capabilities and readiness

Advancement of U.S. interests

Global market forces

Respond to Changing Security Threats and the Challenges of Respond to Changing Security Threats and the Challenges of 

Global Interdependence Global Interdependence involving . . . involving . . .

Roles in achieving federal 

 objectives

Human capital and other capacity for 

 serving the public

Progress toward results-oriented, 

 accountable, and relevant government

Fiscal position and financing of the 

 government

Help Transform the Federal Government Help Transform the Federal Government’s Role and How It Role and How It 

Does Business to Meet 21st Century Challenges Does Business to Meet 21st Century Challenges by assessing . . . by assessing . . .

Client and customer service

Leadership and management focus

Institutional knowledge and experience

Process improvement

Employer of choice

Maximize the Value of GAO by Being a Model Federal Agency and Maximize the Value of GAO by Being a Model Federal Agency and 

a World-Class Professional Services Organization a World-Class Professional Services Organization in the areas of . . . in the areas of . . .

Provide Timely, Quality Service to the Congress and the Provide Timely, Quality Service to the Congress and the 

Federal Federal Government to Government to . . . 

THEMES GOALS & OBJECTIVES

Demographics

Security 

and 

Preparedness

Globalization

Changing 

Economy

Science 

and 

Technology

Quality 

of 

Life

Governance

Accountability Integrity Reliability

SERVING THE CONGRESS 

GAO’S STRATEGIC PLAN FRAMEWORK

MISSION

GAO exists to support the Congress in meeting its constitutional 

responsibilities and to help improve the performance and ensure the accountability 

of the federal government for the benefit of the American people.

Accountability Integrity Reliability
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 35 GAO-03-365SP 

1962

31%

50%

6%

Defense

Social Security

Net interest Medicare & Medicaid

All other spending

1982

9%

34% 25%

21%

11% 19%

32%

17%

23%

9%

2002

13%

Source: Budget of the United States Government, FY 2004, Office of Management and Budget.

Composition of Federal Spending 

By Budget Function
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 36 GAO-03-365SP 

0

10

20

30

40

2000 2015 2030 2050

Fiscal year

Social Security

Net Interest Medicare & Medicaid

All other spending

Composition of Spending as a Share of GDP 

Assuming Discretionary Spending Grows with GDP 

and the Tax Cuts Do Not Sunset

Source: GAO’s January 2003 Analysis

Revenue

Percent of GDP
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 37 GAO-03-365SP 

Social Security

Net Interest Medicare & Medicaid

All other spending

Composition of Spending as a Share of GDP 

Assuming Discretionary Spending Grows with GDP 

after 2003, the 2001 Tax Cuts Do Not Sunset, and 

Social Security Benefits Payable after 2041

0

10

20

30

40

2000 2015 2030 2050

Fiscal year

Source: GAO’s January 2003 Analysis

Revenue

Percent of GDP
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 38 GAO-03-365SP 

-15

-10

-5

0

5

10

15

1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1

State tax revenue

Federal revenue

Real year-over-year quarterly percent change

Federal and State Revenue Trends

Source: State tax revenue from Rockefeller Institute/NASBO. Federal revenue from Bureau of Economic Analysis, Department of Commerce.
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 39 GAO-03-365SP 

State Medicaid Spending

as a Percent of Total State Spending

16

17

18

19

20

21

22

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percent of total state spending

Source: National Association of State Budget Officers (NASBO)
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 40 GAO-03-365SP 

State Spending by Function

as a Percent of Total State Spending,

After 1, 5, and 10 Years

Higher Education

10.5%

Transportation

8.1%

Corrections

3.4%

Public Assistance

2.0% All Other

29.2%

Elementary & 

Secondary 

Education

20.6%

Elementary & 

Secondary 

Education

18.3%

All Other

26.5% Public Assistance

1.8%

Corrections

Transportation 3.1%

7.3%

Higher Education

9.4%

Higher Education

11.2%

Transportation

8.8%

Corrections

3.7%

Public Assistance

2.2%

All Other

31.6%

Elementary & 

Secondary 

Education

21.8%

After 1 year After 5 years

After 10 years

Note: Assuming Current Growth Rate for Medicaid and Current Average Growth for All Other Categories.

Source: National Association of State Budget Officers.

Medicaid

20.8%

Medicaid

26%

Medicaid

33.6%
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 41 GAO-03-365SP 

Total Outlays for Grants to State and Local Governments 

(Fiscal Years 1962-2002)

0

50

100

150

200

250

300

350

1962 1970 1980 1990 2002

Grants for Payments for Individuals Other Grants Total Grants

Billions of FY1996 dollars

Source: Budget of the United States Government, FY2004, Office of Management and Budget.
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 42 GAO-03-365SP 

Number of Federal Preemption Statutes Enacted per Decade

130

120

110

100

90

80

70

60

50

40

30

20

10

0

Before

1900

1900-

1909

1910-

1919

1920-

1929

1930-

1939

1940-

1949

1950-

1959

1960-

1969

1970-

1979

1980-

1989

1990-

1999

Year

1999

est.*

Number

Civil Rights and other

Health, safety, and environment

Commerce and transportation

Banking, finance, and taxation

*The 1990-1991 rate was multiplied by 5 to estimate how many preemptions might be enacted during 1990-1999.

Source: U.S. Advisory Commission on Intergovernmental Relations,Federal Statutory Preemption of State and Local Authority: History, Inventory, and Issues (Washington, D.C., 1992), p.7.
Appendix IV

Intergovernmental Relations Symposium 

Slide Presentation

Page 43 GAO-03-365SP 

Policy Tools and Actors

Source: GAO.

Tools Management

Actors

Exec. Agencies

States & Locals

Foreign Gov't

GSEs

Non-Profits

Contractors

Faith-Based

For Profits

Direct Services

Grants-in-Aid

Contracting Out

Credit & Insurance

Tax Expenditures

User Fees

Regulations

Strategic Planning

Performance Mgmt

Human Capital

Budgeting

Financial Mgmt

IT Mgmt

Acquisitions
Page 44 GAO-03-365SP 

Appendix V

Grant Programs to State and Local 

Governments ApendxiV

Figure 5: Summary of the Number of Grant Programs to State and Local 

Governments: Fiscal Year 2001

Note: Excludes grants with no reported obligations.

 Number of Obligations

 Department or Agency programs in millions)

Agriculture 63 $20,141

Commerce 38 986

Defense 4 66

Education 119 31,928

Energy 5 217

Health and Human Services 158 191,028

Housing and Urban Development 33 27,443

Interior 62 2,582

Justice 55 4,060

Labor 20 7,559

Transportation 24 40,571

Treasury 1 13

Veterans Affairs 6 483

Environmental Protection Agency 44 3,395

Social Security Administration 1 23

Appalachian Regional Commission 5 102

Corporation for National and Community Service 6 324

Equal Employment Opportunity Commission 1 30

Federal Emergency Management Agency 11 331

Denali Commission 1 24

National Foundation on the Arts and the Humanities 8 259

 Total 665 $331,565

Source: OMB analysis of data from December Update to the 2001 Catalog of Federal Domestic Assistance (December 2001).
Appendix V

Grant Programs to State and Local 

Governments

Page 45 GAO-03-365SP 

Figure 6: The 20 Largest Grant Programs to State and Local Governments: Fiscal 

Year 2001 (obligations in billions)

Note: HHS indicates the Department of Health and Human Services. HUD indicates the Department of 

Housing and Urban Development.

 FY 2001 Percent

 Agency/Program Obligations of total

 1. HHS: Medicaid $130.2 39.3%

 2. Transportation: Highway Planning and Construction 30.7 9.2%

 3. HHS: Temporary Assistance for Needy Families 19.1 5.7%

 4. HUD: Section 8 Housing Choice Vouchers 11.4 3.4%

 5. Education: Title I Grants to Local Educational Agencies 8.6 2.6%

 6. Agriculture: National School Lunch Program 6.5 2.0%

 7. Education: Special Education - Grants to States 6.3 1.9%

 8. HHS: Head Start 6.2 1.9%

 9. HHS: Foster Care - Title IV-E 5.1 1.5%

10. HHS: State Children's Health Insurance Program 4.2 1.3%

11. Agriculture: Special Supplemental Nutrition Program for Women, 

 Infants, and Children (WIC) 4.1 1.2%

12. HUD: Public and Indian Housing 3.3 1.0%

13. HHS: Child Support Enforcement 3.2 1.0%

14. Transportation: Airport Improvement Grants 3.1 0.9%

15. HUD: Community Development Block Grants/Entitlement Grants 3.1 0.9%

16. HUD: Public Housing Capital Fund 3.0 0.9%

17. Transportation: Federal Transit Formula Grants 2.9 0.9%

18. Transportation: Federal Transit Capital Investment Grants 2.8 0.8%

19. HHS: Child Care Mandatory and Matching Funds of the Child Care 

 and Development Fund 2.6 0.8%

20. Labor: Unemployment Insurance Grants for State Administration 2.3 0.7%

 Subtotal, 20 largest programs 258.7 78.0%

 

 Remaining 645 programs: 

 Programs of more than $50 million but not in the top 20

 (190 programs) 66.7 20.1%

 Programs of $50 million or less (455 programs) 6.1 1.8%

 Subtotal, remaining 645 programs 72.8 22.0%

 

 Total, 665 programs $331.6 100.0%

Source: OMB analysis of data from December Update to the 2001 Catalog of Federal Domestic Assistance (December 2001).
Appendix V

Grant Programs to State and Local 

Governments

Page 46 GAO-03-365SP 

Figure 7: Trend in the Number of Federal Grant Programs to State and Local 

Governments 1980-2001

 Number 

 of 

 funded 

 Fiscal year programs 

 1980 434 

 1981 367 

 1982 303 

 1983 320 

 1984 330 

 

 1985 335 

 1986 349 

 1987 381 

 1988 415 

 1989 434 

 

 1990 463 

 1991 513 

 1992 539 

 1993 573 

 1994 593 

 

 1995 608

 1996 570 

 1997 583 

 1998 591 

 1999 630 

 

 2000 653 

 2001 665 

Source: OMB analysis.

(450179)
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